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Smoke Shop, LLC v. United States

United States Court of Appeals, Seventh Circuit

August 4, 2014

THE SMOKE SHOP, LLC, Plaintiff-Appellant,

Argued June 2, 2014

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 2:12-cv-01186 -- Rudolph T. Randa, Judge.

For SMOKE SHOP, LLC, a Wisconsin Limited Liability Company, Plaintiff - Appellant: Bridget Zerner, Markham & Read, Boston, MA.

For United States of America, Drug Enforcement Administration, Defendants - Appellees: Matthew Dean Krueger, Attorney, Office of The United States Attorney, Milwaukee, WI.

Before FLAUM and WILLIAMS, Circuit Judges, and DOW, District Judge.[*]


Page 780

Flaum, Circuit Judge.

In 2012, the Drug Enforcement Administration seized over $110,000 worth of smokable " incense products" from a Delavan, Wisconsin retailer called The Smoke Shop. At the time of seizure, the DEA believed that the incense products, which contained synthetic cannabinoids, were controlled substance analogues and therefore illegal under federal drug laws. Smoke Shop contested this assertion and moved for the return of its inventory in federal district court. Later, the substances in the incense products were scheduled by the Attorney General, rendering them contraband. This eliminated Smoke Shop's hopes of recovering its goods, so it brought a conversion action against the federal government for damages under the Federal Tort Claims Act.

The district court dismissed Smoke Shop's FTCA suit on two alternative grounds. It found, first, that the government enjoyed sovereign immunity from Smoke Shop's suit under the detained-goods exception to the FTCA. Second, the court found that Smoke Shop failed to exhaust its administrative remedies because it did not submit a claim for damages to either the DEA or the Department of Justice before filing suit. We affirm on both grounds.

I. Background

This case is before us on a motion to dismiss, so we rely on the allegations in the plaintiff's complaint, without vouching for their truth. Golden v. State Farm Mut. Auto. Ins. Co., 745 F.3d 252, 255 (7th Cir. 2014).

The Smoke Shop is a small retail store in downtown Delavan that sells assorted novelties, tobacco products, smoking accessories, and what Smoke Shop describes as " incense products." As the government's testing later revealed, the incense products in question contained two marijuana-mimicking synthetic cannabinoids, XLR-11 and

Page 781

UR-144. See generally Eliza Gray, The Rise of Fake Pot, TIME, Apr. 21, 2014, at 26. Despite these intoxicating properties, Smoke Shop's complaint avows that the incense products are marked " NOT FOR HUMAN CONSUMPTION," and have " numerous legitimate and legal uses ... ranging from religious ceremonies to the removal of pet odors."

On September 13, 2012, two DEA agents and three local police officers came into the store and seized 8,000 packages containing several different brands of the incense products. The agents told Smoke Shop's owner, David Yarmo, that they were taking the seized inventory to the local police station for testing, and that Smoke Shop would get back whatever was not found to be illegal. Believing that the products contained no controlled substances, Yarmo consented to their seizure.

Several days later, Yarmo went to the local police station to inquire about his inventory. He was told that the DEA had shipped the products to a federal testing facility, so Yarmo next turned to the DEA. Those agents told Yarmo there was " no way" that the DEA would ever return the incense products and that if Yarmo wanted to get the products back he would have to " sue them."

Smoke Shop then filed a motion for the return of property in federal district court. See Fed. R. Crim. P. 41(g) ( " A person aggrieved by an unlawful search and seizure of property or by the deprivation of property may move for the property's return ... in the district where the property was seized." ). In response, the government filed a letter informing the district court that half of the seized products had tested positive for XLR-11 and UR-144, which the DEA considered to be controlled substances under the Controlled Substances Analogue Act, see 21 U.S.C. § § 802(32), 813, 841(a)(1). Because the tested incense products were considered contraband, the government explained, the DEA could not return them. The letter also indicated that the remaining products were due to be tested.

The district court held a hearing on the Rule 41(g) motion in which Smoke Shop's and the government's experts debated whether XLR-11 and UR-144 constituted controlled substance analogues, and the parties continued to brief the issue. While this dispute was ongoing, however, the Attorney General exercised his power under the Controlled Substances Act to schedule XLR-11 and UR-144 as schedule I controlled substances on a temporary basis " to avoid an imminent hazard to the public safety." 21 U.S.C. § 811(h).

As a result of the Attorney General's action, the district court dismissed Smoke Shop's Rule 41(g) motion. The court opined that the Attorney General's " decision to schedule UR-144 and XLR-11 suggests that they were not analogues in the first instance, and now, Mr. Yarmo must recoup his losses through further litigation against the government." The Smoke Shop, LLC v. United States, 949 F.Supp.2d 877, 879 (E.D. Wis. 2013). Accordingly, the court suggested that Smoke Shop amend its pleadings to effect this " further litigation."

Smoke Shop took the court up on its suggestion and filed an amended complaint against the United States for unlawful conversion under the Federal Tort Claims Act, seeking compensatory damages. Smoke Shop alleged that the government took its incense products--collectively worth about $110,000--with no legal grounds to do ...

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